Electric gold rush zapping California

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Dec. 12, 2000, 8:43PM

Electric gold rush zapping California By MICHAEL DAVIS Copyright 2000 Houston Chronicle

The crisis in California's power markets could mean a Christmas bonus for Houston energy companies selling power in the state.

The cold weather that has hit Houston and the rest of the nation has put a serious strain on electricity supplies throughout the West Coast.

California electricity prices have soared this week after the state removed price caps on wholesale energy transactions to attract power into the market. Shares of companies with power plants that sell to the California wholesale market have risen in response.

The lifting of the price caps means more power sales for four Houston companies that own about 25 percent of the unregulated power generated in California. These include Reliant Energy, Dynegy, El Paso Energy Corp. and Enron Corp.

Reliant also owns power plants in Nevada that can sell power into the California market to capitalize on the higher prices now that the price cap has been lifted.

Companies such as Reliant and Dynegy got into California buying plants that the state's large investor-owned utilities sold to comply with the law to deregulate the state's $23 billion electricity market. There have not been any power plants built in California in 10 years.

The lack of additional generating capacity combined with growing demand is the most often cited culprit for California's power woes. Add to that are poorly written laws that opened the state to competition.

The current cold snap has made a bad situation worse.

A key source of backup power, water-generated hydropower from the Northwest, is not being sold in California because it is needed at home because of the cold weather.

"We have been saying for months that new generation is needed in California," said Richard Wheatley, a spokesman for Reliant Energy, parent of HL&P. Reliant, through its unregulated operations, is the third-largest nonutility power generator in California.

Making the situation even worse is a tightening supply of natural gas needed to burn in power plants and to heat homes.

One of the biggest suppliers of natural gas to California is El Paso Energy Corp. Its pipeline to California is still operating at less than full capacity. The pipeline now moves about 920 million cubic feet of gas per day; its capacity is 1.1 billion cubic feet of gas per day. The company is still repairing its pipeline that ruptured in a fatal August explosion in New Mexico.

The El Paso system was named before a Senate committee Tuesday as one of the main constraints on California's gas market by John Mazur, the acting administrator for the Energy Information Administration.

Mel Scott, a spokesman for El Paso Energy, said the company has been unfairly singled out for criticism. He said the lines' customers have found other sources to make up for for reduced flow of gas from the El Paso line.

"We have been getting hammered over this, and we are just one of four major pipelines that serve California," Scott said. "Our customers are taking everything we can deliver; they physically are taking all of the natural gas they can."

Other large pipelines into California are owned by Williams Cos., PG&E Corp. and TransWestern.

Whoever is to blame, the reality is that spot natural gas prices in California have in recent days risen to the unheard-of price of $40 per thousand cubic feet.

While El Paso cannot take advantage of such prices on its pipeline gas -- which is sold under long-term contract -- its wholesale trading arm can profit from these prices, as can wholesale trading operations at other companies.

Natural gas prices on the futures market, which have been hitting new records daily, dropped sharply on Tuesday on forecasts of milder weather next week. Natural gas for delivery in January to the Henry Hub closed at $8.14, down $1.26 per thousand cubic feet.

The relatively small decline in futures prices will not spell any relief for California, which is using all of the natural gas it can get its hands on.

California has been struggling to keep up with growing demand for power all year. In response to soaring prices when the weather was hot, the California Independent System Operator, which oversees operation of the state's power grid, began capping prices, first at around $750 per megawatt-hour, which was later decreased to $250.

The cap was lifted earlier this week to try to lure power supplies from other states where generators can get a better price for their power.

The result has been wholesale electricity prices setting daily records on the California Power Exchange, the state's main electricity market. The average price paid for electricity to be delivered Tuesday was $904 per megawatt-hour, up from $612 on Monday.

Shares of all of the companies that have merchant power plants in California rose this week when the price caps were limited.

The impact of the changing power market in California is much longer than just a quarterly increase or share price bump-up, said Bill Hyler, energy analyst with CIBC World Markets in New York.

With the price caps lifted, and plans to shelve an even stricter $150 per megawatt-hour cap that was to be implemented in January, companies will have more incentive to get into the California market, Hyler said.

"The ramifications of this go out for years," Hyler said. "The consumer groups were looking for $100 price caps, and you can't make money with $8 to 10 gas with $100 price caps."

The Federal Energy Regulatory Commission is expected to weigh in this week on the decision to lift the price caps. Hyler said he expects they will support the move.

Removing the price caps will give companies more incentive to consider building new California power plants, Hyler said. But it's not a quick fix. It takes about two or three years to get a new power plant sited, permitted, built and running.

The long lead time for constructing new plants also means that the tight power supply situation in California cannot and will not be solved overnight, even when the weather moderates in the spring.

This is the second time this year that the California markets have gone into a tailspin.

In May, an unusual heat wave pushed temperatures in the San Francisco Bay area into triple digits, causing rolling blackouts. That helped power and natural gas companies post much improved second-quarter results.

During the May heat wave, Dynegy's four California plants ran more they did in all of May and June of 1999.

Such results from unregulated power sales continued into the third quarter. Reliant's wholesale energy business had third-quarter operating income of $319 million, up from $43 million in the same period last year. About $100 million of that profit came from the California market, Wheatley said.

Reliant and others power suppliers were able to provide enough power to get California through the hottest months of the year. So far, it has only taken about four days of severe winter weather to cause the crisis in California.

http://www.chron.com/cs/CDA/printstory.hts/business/770843

-- Martin Thompson (mthom1927@aol.com), December 13, 2000


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